401Ks

Solo 401(k)s vs. SEP IRAs: Sizing up your saving options while self-employed Both retirement accounts offer high contribution limits, but which one is right for you? If you’re self-employed, you likely wear several ill-fitting hats: accountant, admin, HR rep. And that last one is low-key important, because it means no one is setting up a retirement plan for you. So what's a gig worker, small business owner, or solo practitioner to do? There’s the trusty IRA, of course. But its tax benefits phase out at certain income levels, and its $7,000 annual contribution limit fills up fast. You may want—or need—to save more to realize your retirement goal. Luckily, two lesser-known retirement accounts offer self-employed workers 10x more capacity for tax-advantaged investing: the solo 401(k) and the SEP IRA. They’re similar in that sense (high contribution limits), but they also differ in some important ways. We’ve found that for many self-employed workers, choosing between the two often hinges on their hiring or lack thereof: 👉 No employees beyond a spouse, and no plans to hire? Consider a solo if you prioritize Roth access and a slight edge in contribution limits. Consider a SEP if you prioritize less administrative work. 👉 See yourself hiring a few employees in the not-so-distant future? Consider starting with a solo 401(k), then transitioning to a group 401(k) plan if you prioritize Roth access and more flexibility in how you structure employee contributions. Consider a SEP for slightly easier admin, and the ability to pause contributions to your employees’ SEPs during down years. 👉 Planning to expand beyond 5-10 employees at some point? Consider the solo-to-group 401(k) move for more flexibility in how you structure employee contributions. You can max out your own retirement savings, for example, while letting employees decide their own contribution rates. That’s the TL;DR version. For a deeper dive, let’s compare the two accounts across a few categories: High contribution limits Easy admin Roth access Small business growth High contribution limits Both accounts let you save plenty for retirement—upwards of $70,000 a year—but solos give you a couple of ways to stretch that even further: Case #1: You’re playing catch-up If you're age 50 or older and catching up on your retirement savings, a solo 401(k) offers additional “catch-up” contributions of $7,500 each year, or $11,250 for those 60-63. Note that starting in 2026, any catch-up contributions must go into a Roth solo specifically (more on those below) if you received more than $145,000 in FICA wages (salaries, commissions, etc.) the prior year from your solo’s sponsoring company. Case #2: You’re a middle class super saver Say you earn less than $280,000, but you save well above the standard advice of 10-15% for retirement. In this scenario, you may run up against the SEP’s 25% compensation cap before you reach its overall $70,000 limit. But with solos, you can contribute as both an employer (up to 25% of compensation) and an employee (up to $23,500) until you hit the overall limit. ⚖️ Advantage: solo 401(k) Easy admin Both a solo 401(k) and SEP IRA, assuming they’re streamlined digital offerings such as ours, are simple to set up. You can open a Betterment SEP entirely online, while a Betterment solo requires a quick call with our Licensed Concierge team to get the ball rolling. Each account type is relatively low maintenance as well. Neither a SEP nor a solo require annual paperwork, with the one exception being for solo 401(k) balances that exceed $250,000. In that case, the IRS requires solo owners (aka “sponsors”) to file Form 5500-EZ. While we’re not a tax advisor, and always recommend working with one, the form is relatively straightforward to fill out. ⚖️ Advantage: SEP IRA Roth access Solos and SEPs are designed for retirement, so the IRS gives special tax treatment to both account types. But in practice, solos give you not one but two different flavors of tax treatment to choose from: You can contribute with pre-tax dollars via a traditional solo 401(k), lowering your taxes now and freeing up more money to invest. You also have the ability to contribute with after-tax dollars via a Roth solo 401(k), enjoying tax-free withdrawals in retirement. And Roth solo 401(k)s come with two added bonuses: Unlike traditional retirement accounts, they’re not subject to Required Minimum Distributions (RMDs) in retirement. Unlike Roth IRAs, they come with no income limits of any kind. Roth SEP IRAs, meanwhile, have technically been allowed by the IRS since 2023, but few providers have rolled them out yet. ⚖️ Advantage: Solo 401(k) Small business growth At some point in your self-employed journey, you may bring on hired help. In this case, it’s possible to transition both account types to accommodate employees. Some SEP providers let you shift from a solo practitioner to an employer who contributes to employees’ SEP IRAs on their behalf. But there’s a catch: you must contribute the same amount to their SEPs as you do your own, which may prove challenging depending on your business. With solo 401(k)s, on the other hand, you can include a spouse from the get-go, provided they’re an employee or co-owner of the business. And if you see the potential for expanding beyond a handful of employees down the road, it may make sense to simply transition your solo 401(k) to a group 401(k) plan and enjoy more flexibility in how you structure contributions for your team. Our support team handles moves like this often and can help you when the time comes. ⚖️ Advantage: Solo 401(k) So which account is right for you? The good news is both SEP IRAs and solo 401(k)s offer excellent tax advantages that can help you reach retirement quicker. We offer both at Betterment, and make it easy to open either one. Because when you’re self-employed, you’re busy running your business. Optimizing your retirement savings? Leave that to us for one less hat in your wardrobe.

Should you fill up your 401(k) first, or your IRA? Navigating one of retirement saving’s first forks in the road. Can you have both a 401(k) and an IRA? Yes! But having access to both accounts begs the question: Which one is more deserving of your retirement dollars? The answer, as it so often does in personal finance, depends on your situation. So let’s explore when a 401(k)-first mentality makes sense, and when it doesn't, before closing things out with a wildcard third option that might warrant both your attention and your savings. A quick refresher on retirement accounts For the sake of this conversation, we're focusing on the two most common retirement accounts: the IRA and the 401(k), including the non-profit/public equivalent 403(b) account. Both come with built-in tax advantages, annual contribution limits, and eligibility criteria: 401(k) Accessible to: Anyone whose employer offers one 2024 contribution limit: $23,500 (for those under 50) IRA Accessible to: Anyone whose Modified Adjusted Gross Income (MAGI) falls below the IRS's eligibility limits (see table below) qualifies for tax benefits. 2024 contribution limit: $7,000 (for those under 50) 2025 IRA income limits Traditional IRA* Modified Adjusted Gross Income (MAGI) Roth IRA Modified Adjusted Gross Income (MAGI) Full tax deduction $0-$77,000 (single) Full contribution $0-$145,999 (single) $0-$123,000 (married) $0-$229,999 (married) Partial tax deduction $77,001-$86,999 (single) Partial contribution $146,000-$160,999 (single) $123,001-$142,999 (married) $230,000-$239,999 (married) No tax deduction** $87,000 and up (single) No contribution $161,000 and up (single) $143,000 and up (married) $240,000 and up (married) *If covered by a retirement plan at work **Anyone is eligible to make taxable contributions to a traditional IRA Source: IRS Power ranking your retirement accounts In general, there are a few reasons why you might default to the 401(k), including but not limited to: You can contribute by way of payroll deductions and ease the sting of saving. Many employers offer matching contributions, aka free money. And you can contribute significantly more money to them than IRAs. Altogether, that's a lot of pros working in the 401(k)’s favor. But not all 401(k)s are created equal. Some providers charge more for limited investment options. According to the 24th edition of the 401k Averages Book, the average investment expense for some smaller plans1 was 1.12%. By comparison, you can invest with a Betterment IRA for an all-in fee well south of 1%. So ask your employer or 401(k) provider for help sizing up your total costs. Or take a look at your 401(k) statement for code names like: Management fees Asset-based fees Operating expenses Expense ratios If you find your 401(k) costs are significantly steeper than an IRA, consider the following order of operations: Fill up your 401(k) up to your employer’s match, assuming they offer one. Max out your IRA, assuming you’re eligible. Come back to your 401(k). On the other hand, if your 401(k)’s fees are competitive, congratulations! Things just got simpler. Consider maxing it out first before turning your attention to an IRA, or that wildcard option we mentioned earlier. A quick aside on the Health Savings Account (HSA) Sure, the name says "health," but HSAs can be repurposed for retirement savings as well. They come with a $4,150 contribution limit for individuals, and they’re available to anyone enrolled in a high-deductible health plan (HDHP). They’re also triple tax-advantaged, meaning money is tax-free going in, tax-free while it grows, and tax-free coming out, assuming it’s used for qualified expenses. That’s one more tax perk than 401(k)s and IRAs, which make you choose between either tax-deferred contributions or tax-free withdrawals. Tax-free contributions Tax-free growth Tax-free withdrawals Traditional 401(k)/IRA ✓ ✓ X Roth 401(k)/IRA X ✓ ✓ HSA ✓ ✓ ✓ So if an HDHP is right for your healthcare needs, consider prioritizing an HSA before an IRA. Between those two accounts and the 401(k), that's more than $30,000 worth of annual investing potential. Fill up those tanks, and you’ll be well on your way to retiring. Now just enjoy the ride.